Recover SIPC Claims

Understanding the Role of SIPC in Protecting Investors from Fraud The Securities Investor Protection Corporation (SIPC) is not a Federal Deposit Insurance Corporation (FDIC) for the securities brokerage industry. The Madoff and Stanford cases have highlighted the differences. The purpose of this article is to examine when, why, and how SIPC funds are used to assist fraud victims. The FDIC was established in 1933 during the Great Depression to maintain stability and public confidence in the nation’s financial system by insuring deposits and supervising financial institutions for safety and soundness. After thousands of bank failures in the 1920s and early 1930s, Congress decided that restoring confidence in the banking system required government action. As an independent agency of the federal government, the FDIC now insures approximately $9 trillion of deposits in U.S. banks and thrifts – almost every bank and thrift in the country. Since the agency began its coverage on January 1, 1934, no depositor has lost any money in a FDIC insured institution. If a bank is failing, the FDIC takes over at the close of business on a Friday and quickly restores depositors’ funds. In contrast, SIPC is small, having slightly more than $1 billion in reserves. This is miniscule in comparison to stock fraud losses. Microcap stock fraud alone is estimated to range between $1 and $3 billion per year. It covers only eligible investments 1Among the investments that are ineligible for SIPC protection are commodity futures contracts (unless defined as customer property under the Securities Investor Protection Act) and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are...

General Solicitation One Week On

As readers of this and other startup-focused blogs will be aware, exactly one week ago today general solicitation of securities offerings to accredited investors became legal for the first time in 80 years. Prior to the 23rd of September, coverage of this upcoming shift was divided with some predicting major alterations to the landscape, others predicting hardly any change at all, and yet others delaying judgment, at least until some additional proposed rules are finalized. Reading the Tea Leaves What can we learn from the first week’s tea leaves regarding the initial reaction to general solicitation? Some notable actors were off to the races, with folks like AngelList and WeFunder immediately jumping in and offering solutions that take advantage of the broad exposure offered by general solicitation (while recognizing the need to still comply with accredited investor requirements). Leading the charge were Second Market and WeFunder. The latter has taken perhaps the most proactive stance on general solicitation, even offering to do some securities work on behalf of companies (using generic forms). These companies seem to be betting that the current window between the enactment of the rules adopted in July allowing for general solicitation and the pending adoption of any of the proposed rules will give them a significant head start on their competitors. They are also betting that any new rules won’t change things significantly (the best case for them), or at least won’t be applied retroactively. On the opposite end, FundersClub has taken a cautious “wait-and-see” approach. CEO Alex Mittal has made it clear that the VCs, angel investors, law firms and others that he has...

General Solicitation Now Allowed. What’s Required?

As has been continuously reported in the media, and on fine law blogs, today marks the end of the 80 year ban on general solicitation (public advertisement) for securities sales. This means that for the first time since the Securities Act of 1933 was enacted, companies will be able to go out and solicit groups of accredited investors to invest in their startups, provided that they: Check a box on their form D indicating that they have generally solicited; Take additional steps to verify that their investors are in fact accredited (one page questionnaire no longer good enough); and Ensure that they do not accept any funds from non-accredited investors. #1 is self explanatory. #2 requires a bit of attention, because in the past is was sufficient to have an investor fill out a basic questionnaire verifying that they comply with the definition of “accredited”, as defined in Rule 501 of Regulation D. Now, however, those generally soliciting investments must take “reasonable steps” to ensure that the investors are indeed accredited, and must keep proof of having done so. This means that you will need to ask for personal financial documentation, such as copies of form W-2 or 1040, bank statements from past three months,  and brokerage statements from your potential seed or Angel investors. Many will scoff at this intrusive requirement. #3 is also important. While a “regular” Rule 506 offering still allows for up to 35 non-accredited investors, if you check the box indicating that you’ve generally solicited, you may not sell ANY shares to non-accredited investors. In addition, the SEC took the confusing step of issuing...

Environmental whistleblower

The Importance of Being Earnest: An Environmental Whistleblower’s Guide to Protection Under SOx § 806 and Dodd-Frank By John J. Tollefsen 1The author practices law in Oregon, Washington, and New York. He has been lead counsel on several SOx § 806 cases including Tides v. The Boeing Co., 644 F.3d 809 (C.A.9, Wash. 2011), cert. den. 132 S.Ct. 518 (2011) and Reid v The Boeing Co., 2009-SOX-27 (ARB Mar. 30, 2012). The Sarbanes Oxley Act of 2002 (“SOx”) § 8064SOx § 806 is codified as 18 U.S.C. § 1514A(a)(1).protects certain employees who reasonably believe they are reporting a violation of a law, rules, or regulation listed in § 806. Their belief must be subjectively and objectively reasonable.2E.g., Tuttle v. Johnson Controls Battery Div., 2004-SOX-76 (ALJ Jan. 3, 2005), an ALJ explained: “Protected activity is defined under SOX as reporting an employer’s conduct which the employee reasonably believes constitutes a violation of the laws and regulations related to fraud against shareholders. While the employee is not required to show the reported conduct actually caused a violation of the law, he must show that he reasonably believed the employer violated one of the laws or regulations enumerated in the Act. Thus, the employee’s belief ‘must be scrutinized under both subjective and objective standards.’ Melendez v. Exxon Chemicals Americas, 1993-ERA-6 (ARB July 14, 2000)”. The employee must earnestly and sincerely believe in good faith that there is a violation. The courts and administrative law judges (“ALJs”) have been generally hostile to § 806, adding additional barriers to recovery with the result that few claimants have been protected. This paper argues that claims under...

Federal Securities Law Overview

Federal Securities Law Overview With Commentary by John  Tollefsen1The author has served and continues to serve on several securities laws committees of the American Bar Association Business Law and Litigation Sections. He has been a speaker at Continuing Legal Education seminars on securities law. He obtained his Series 27 (Financial Principal), 24 (General Principal), 7 and 63 NASD licenses and founded two securities broker dealers businesses. He also managed a Securities Exchange Commission licensed stock transfer agent. His practice included numerous private placements and several public offering registrations. He was privileged to make quasi-official visits with a team of ABA securities lawyers to ranking members of several international stock exchanges including some in China and the former Soviet Union and Soviet-Bloc countries of Poland, Czechoslovakia, and Hungary. One delegation was headed by the Solicitor General of the SEC. He has been active in the SEC Small Business Forum on Small Business Capital Formation since 1982.   U.S. banking laws3The securities laws are a subset of banking regulation. Banks and broker-dealers were combined except during the Glass-Steagall regime (1933-1999). were written in response to financial crisis. The stock market first crashed in 1792. The first of thirteen major bank panics occurred in 1814.4Charles W. Calomiris, U.S. Bank Deregulation in Historical Perspective, (Cambridge: Cambridge University Press, 200), 98. The Wall Street Crash of 1929 did not trigger a major bank panic. Id. In times of economic stress, it is politically popular to bash the “robber barons of Wall Street” creating a season of “financial reform”. Thus, the Securities Act of 1933 was passed unanimously without debate. More recently the Sarbanes Oxley...

Qui Tam Law Overview

The traditional name for cases which attempt to recover money defrauded from the king is “Qui Tam” litigation. Qui Tam is pronounced “kee tam” or “kway tam”) and is an abbreviation from the Latin “qui tam pro domino rege quam pro sic ipso in hoc parte sequitur” meaning “who as well for the king as for himself sues in this matter.” History of Qui Tam Laws in the United States Qui tam legal actions can be traced back as far as 13th Century England where they were used by private citizens to gain access to the king’s court. The U.S. legal system, derived from the British system, allowed qui tam actions since the nation’s founding in 1776. They were rare. During the Civil War, Congressional hearings investigated widespread instances of military contractor fraud including defective products, substitution of inferior material, and illegal price gouging. At the urging of Abraham Lincoln, a former practicing lawyer, Congress enacted the Civil False Claims Act in 1863 as a weapon to fight procurement fraud. This law has also been known as the “Lincoln Law” and the “Informer’s Act.” The False Claims Act was designed to entice whistleblowers to come forward by offering them a share of the money recovered. Even though this Act was enacted to combat military contractor fraud, it was applicable to all government contractors, federal programs and any other instances involving the use of federal revenue. The Act allowed any person to act as a “private attorney general” and sue for recovery of the money taken. The named plaintiff on the action is the United States Government. The one filing...